Complex Instrument Allowance at Mutual Funds

42 Pages Posted: 22 Mar 2017 Last revised: 4 Nov 2019

See all articles by Paul Calluzzo

Paul Calluzzo

Queen's University - Smith School of Business

Fabio Moneta

Telfer School of Management, University of Ottawa

Selim Topaloglu

Queen's University - Smith School of Business

Date Written: November 2, 2019

Abstract

We study the loosening of restrictions on the use of leverage, derivatives, and illiquid assets by mutual funds. In contrast to previous studies, we find that the allowance of these complex instruments is associated with poor performance and higher risk. The underperformance is most acute during market downturns and among weakly monitored funds. We also find that mutual funds that actually use these instruments underperform. Overall, our results suggest caution in allowing funds to use these complex instruments.

Keywords: mutual funds, complex instruments, leverage, derivatives, illiquid assets, borrowing, margin, short selling, options, futures, restricted securities, performance, risk

JEL Classification: G11, G23

Suggested Citation

Calluzzo, Paul and Moneta, Fabio and Topaloglu, Selim, Complex Instrument Allowance at Mutual Funds (November 2, 2019). Available at SSRN: https://ssrn.com/abstract=2938146 or http://dx.doi.org/10.2139/ssrn.2938146

Paul Calluzzo

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Fabio Moneta

Telfer School of Management, University of Ottawa ( email )

136 Jean-Jacques Lussier Street
Ottawa, Ontario K1N 6N5
Canada

Selim Topaloglu (Contact Author)

Queen's University - Smith School of Business ( email )

437 Goodes Hall
143 Union St.
Kingston, Ontario K7L 3N6
Canada
613-533-6573 (Phone)
613-533-2321 (Fax)

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